RELATIVE STRENGTH INDEX (RSI) INDICATOR

The RSI is an indicator used in technical analysis that shows when an asset is overbought or oversold. It oscillates between 0 and 100, with values above 70 indicating overbought conditions and those below 30 indicating oversold conditions.

Moreover, it can spot divergences and possible trend reversal points. Still, the indicator's most basic and common use is identifying overbought and oversold conditions. These areas offer traders trading opportunities, as we will see below. However, you should not use the indicator alone. Using it with other technical tools is advisable to get better results.

BUY SETUP

For a buy opportunity, wait for the RSI to show that the price is oversold. When the RSI records readings below 30, the price is undervalued and could rise. Using price action, wait for a bullish candle and enter after the second one. Place your stop loss slightly below the previous low and hold the position until the RSI gets overbought, depending on your strategy.

SELL SETUP

The overbought condition means that the asset is overvalued and might soon reverse. Therefore, traders often look for shorting opportunities in this region.

The chart below shows how you can enter a sell position. Once the RSI shows that the price is overbought, wait for the price to start making bearish candles and enter according to your strategy. For instance, you could enter at the second bearish candle. Place your stop loss slightly above the recent high and hold the trade till the price gets oversold. You can exit depending on your strategy.

CONCLUSION

The RSI indicator identifies areas where the prevailing trend could reverse. Therefore, it gives traders good entry opportunities for reversal trades. However, just like any other indicator, you should not use it alone.

Additionally, did you know that we are the first website to provide our clients with comprehensive weekly backtesting data? Not just that, we give you data with a specific win/loss ratio. Moreover, you get to execute your trades automatically.